A Ban on Bitcoin and Cryptocurrency

What would it do, and would it work?

A cryptocurrency ban is a topic that makes its way into the mainstream media from time to time. Mrugakshee and I need to address this concern of our audience on a regular basis, and constantly update our opinion as things progress. I almost wish that a government would just hurry up and slap a blanket ban on cryptocurrencies, so we can find out what happens.

— Oh wait! Some governments have. South Korea, China, Nigeria, and India have all implemented a ban on cryptocurrencies in one fashion or another.

So we can actually use this knowledge to surmise what would happen if we take the ban to the extreme. In this letter, I am going to answer the following questions.

  • What effect did past bans have on the cryptocurrency industry?

  • What if the United States implemented a ban on cryptocurrency?

  • Is a widespread ban on cryptocurrency actually likely to take place?

The Cryptocurrency Bans of the Past

If we can learn one thing from the bans of the past, it is that they are rarely an all encompassing, blanket ban. Most of the time, the regulators in the countries that implement the bans narrow in on a single aspect such as P2P (Peer to Peer) Trading1, or privacy coins2. The other thing that we can conclude without even looking at the contents of these bans, is that the bans don’t seem to be working. Cryptocurrency trading and adoption is up in virtually every country in the world3. Let’s take a look at past bans to see what strategies these countries have employed.

South Korea Ban in 2018

The ban that South Korea implemented looks more like regulations. But that didn’t stop the media from calling it a ban. There were dozens of articles published by reputable news sources that declared the action taken by South Korea to be tantamount to a ban. The details of the regulations enacted in January 2018 amounted to this:

  • Exchanges cannot accept deposits from anonymous bank accounts

  • Exchanges cannot accept business from those under the age of 18

  • South Korean Exchanges cannot accept business from foreigners

All this really adds up to, is “Know Your Customer” regulation. This is already a common practice in the EU, US, and Canada. That didn’t stop the price of Bitcoin from falling in South Korea by 15% upon the announcement of the ban. The only thing I feel like I can conclude from this is that the media is willing to twist words in order to rattle the markets.

China Ban in 2017/2018

China implemented a ban on initial coin offerings4 (ICOs) in late 2017. For context, ICOs were largely responsible for the massive rise in the entire cryptocurrency industry in 2017. Additionally, select Bitcoin exchanges were shut down for undisclosed reasons. Presumably those reasons had to do with the untracked and unmonitored transfer of large amounts of money.

I can actually appreciate what China was trying to do with their ICO ban. There was an unprecedented level of fraudulent funding opportunities being presented to the public. This was a fantastic way for organized crime to amass large fortunes overnight at the expense of retail investors. ICO’s were vulnerable to attack because they were orchestrated by companies and websites which are both centralized entities, and thus able to be shut down. Since then, a range of different funding methods have been established that are entirely outside the grasp of regulators (see IDO5, STO6, IEO7, Airdrops8).

Nigeria Ban of 2020

One of the best examples of why a cryptocurrency ban won’t work, is Nigeria9. In September 2020 they placed perhaps one of the largest blanket bans on cryptocurrencies out of any country before. Nigeria has some of the worlds most stringent currency controls. For example, Nigerians are limited to $100 withdrawals on any given day. This actually means that they cannot purchase things greater than $100 with their credit or debit cards. This restriction on capital actually creates demand for cryptocurrency which is obviously without sending and receiving limits. Since the ban, Nigeria has become Africas Largest P2P Market10. Furthermore, Bitcoin typically trades at a premium in Nigeria due to the lack of accessibility for currencies such as the USD11.

What if the United States implemented a ban on cryptocurrency?

If the United States actually implemented a blanket ban on cryptocurrency, I believe several things would happen.

  1. Bitcoin (and other cryptocurrencies) would trade at a premium.

    Any time something is outlawed, whether that is guns, alcohol, or marijuana, it ends up trading at a premium. Why? It’s because a ban doesn’t stop the public demand for that item/good/substance. If a ban does anything, it cuts the supply, and forces the price upwards, because of the sustained demand. If there is additional risk to dealing with cryptocurrencies, this would inevitably force the price upwards. The additional risk comes from dealing with the newly formed black market around cryptocurrencies, as well as the potential to be reprimanded by law enforcement.

  2. Economic Attack on American Companies

    A blanket cryptocurrency ban is tantamount to an economic attack on American companies. The number of companies choosing to build, and integrate with cryptocurrencies is growing by the day. If a blanket ban were to come into effect, then they would simultaneously be saying that Tesla, MicroStrategy, and Square are all unlawfully conducting business. The outcome of this is uncertain, but the stock of these companies would surely suffer.

  3. Economic Attack on Americans

    An estimated 33 million (10%) Americans hold cryptocurrency12. A ban on cryptocurrency is declaring that 33 million American need to get rid of a form of money that they have deemed to be the best place to store their money. Not only is this unconstitutional (property rights), it is almost logistically impossible to facilitate. What are these people supposed to do with the cumulative untold billions worth of cryptocurrencies they have amassed?

Is a widespread ban on cryptocurrency actually likely to take place?

— No

One of the more important facets of any law, is whether or not it can be enforced. We need to look no further than pirate bay and the torrenting of movies in order to understand that censorship of anything sufficiently decentralized is nearly impossible. How would any government enforce a law against the populous that have decided to hold cryptocurrencies? Take the United States for example. How to tell 33 million people that they need to turn in / sell / dispose of their Bitcoin? Would the government purchase it from them at a premium like the Gold Reserve Act of 193413? Do the people who don’t comply get sent to prison? What about the people that are anonymously holding cryptocurrency?

A cryptocurrency ban seems to leave the asker with more questions than answers. The questions asked about the practicality of a ban also have an edge of totalitarianism, forcing individuals to part with the property they’ve earned or purchased.

What we can expect is more regulations. We should not only expect this, but want this as responsible citizens. Proper regulations around cryptocurrencies means less retail investors getting burned by fraudulent cryptocurrency schemes. It means more education at the institutional level. Ultimately, more regulations means more adoption. Shark Tank’s Kevin O’Leary has mentioned that he might see cryptocurrencies in a different light if there were more regulatory oversight14.

What if a ban did take place?

In India, innovating on blockchain and owning cryptocurrencies has been banned before, namely in 2018. After the Supreme Court of India lifted the ban in March of 2020, there have been talks of yet another ban on Bitcoin and other cryptocurrencies, all dubbed under the ruse of private currencies. Anything that is not owned or controlled by the government or the central bank is understood as owned by institutions in the private sector. This can be quite confusing to crypto enthusiasts who understand private currencies as those that mask your identity and transaction information.

Nomenclature aside, if India was to go through with their ban, it would be the kind of regulation that sets innovation back a couple years, instead of offering regulations to allow and enable companies to build on the future of finance.

Gold is a physical entity, and can be confiscated. With respect to cryptocurrencies, unless they are on an Exchange, they can’t really be confiscated. Mrugakshee often jokes that education in India is partly a test of your memory since much of her high school years, she wasn’t graded on her intelligence, but on how well she could recite what the textbook said. Since that tradition is not likely to have discontinued, the 5 million or so Indians that hold crypto could simply learn the 12 - 24 word phrase of their non-custodial wallet. Your memory, unlike your account on any exchange, is unconfiscatable15.

The Takeaways

Bans do not have the ability to sway the momentum of cryptocurrencies. The decentralized nature of the cryptocurrencies allows for them to operate entirely outside of the borders of countries; Peer to Peer exchanges make sure of that. What I believe governments are working on as you read this, is their own digital currency competitors (Central Bank Digital Currencies). This appears to me as their only recourse for taking attention away from cryptocurrencies. You can expect me to cover this topic in future letters as more countries roll out their own digital FIAT. Until then, I hope this letter has given you something to think about on the topic of cryptocurrency bans.

Regards,

Keegan